A Sneak Peak; Inside Barbara Friedberg’s Personal Portfolio-Part 1

Posted by Barb on September 7th, 2010

Assess Your Risk Tolerance

EXCITING NEWS: I was selected to deliver a national training in San Francisco this November entitled: Personal Finance Solutions for Busy Mental Health Professionals. This 3 hour workshop includes material from my upcoming eBook. Stay tuned to get first crack at the NEW EBOOK. And it’s FREE to my readers.

“Risk comes from not knowing what you’re doing.” Warren Buffett

I’ve been investing for many many years. In my 20’s all I could think about was “the great depression” and how so many lost so much. Although I had a Bachelor of Science degree in Economics and had taken a class or 2 in the stock market, I was scared of stock investing. I was terrified of risk and I certainly didn’t know much about investing.

As I acquired some cash, I went to visit a stock broker who respected my preferences and introduced me to some bonds and bond funds. He introduced me to the dollar cost averaging  and answered my investing questions by loaning me his investing training manuals. After dipping my toe in the investing pool, learning a bit about investments, and watching my net worth grow for a while, I gained some confidence. A lifelong passion was born.

MAIN TOPIC; Risk tolerance THEN and NOW

Although my investment portfolio went up and down, I got used to the volatility. I was still afraid of “losing it all,” but learned through study, that if I diversified my assets, the ups and downs of my portfolio would even out. I didn’t know it at the time, but my RISK TOLERANCE was governing my investment decisions.

For those of you just starting out, or learning about investing, start with introspection. When your investment value goes down 10-15%, are you a nervous wreck? Does this small percent drop in your portfolio terrify you and keep you up at night? If so, you need to titrate your portfolio to honor your temperament.

WHAT THE HECK DOES THAT MEAN?

Riskier assets with more ups and downs usually offer HIGHER RETURNS.

Stock investments: Individual stocks, stock mutual funds, international stocks offer the possibility of greater returns along with more risk.

Bond investments: Individual bonds, bond funds, corporate, and government bonds offer lower returns and less volatility.

SOUNDS SIMPLE; JUST INVEST IN STOCKS, GET HIGHER RETURNS.

OR –  SCARED OF RISK? INVEST IN BONDS AND ACCEPT LOWER RETURNS.

Wait a minute, not so simple.

These investing maxims have held up over the long term IN THE PAST; but what about the last 5 years? According to Morningstar.com,  during the last 5 years, bonds outperformed stocks by a large margin.

5 YEAR RETURNS-annualized

Morningstar US Market Index-0.67%

Morningstar Core Bond Index-6.04%

Practical Application: What should I do?

Are you totally confused? To summarize, long term stocks offer higher return with more risk; bonds have lower returns and lower risk. But in the past 5 years, stocks had high volatility and low returns and bonds outperformed stocks by a huge margin.

Welcome: DIVERSIFICATION

Those rules of risk and return have held true in the past over the long term, > 10 years.

 NO ONE KNOWS WHAT TYPE OF RETURNS AND VOLATILITY THE MARKETS HOLD IN THE FUTURE.

Protect your investments by spreading around the risk.

During the past 5 years, if your investment portfolio looked like this:

50% STOCKS

50% BONDS

Your annualized return would have been 3.36% with moderated volatility.

The lesson is to choose investment funds in a variety of asset classes. The ups and downs will balance out and moderate the returns and risks.

Conventional wisdom recommends a greater percent of your investment in stocks if you are younger and can tolerate more risk. If you are older and/or more risk averse, raise the percent of bond assets.

Continue reading this series and you will learn how I invest our family assets.

BEFORE YOU INVEST YOU MUST READ 10 STEPS YOU MUST TAKE BEFORE BEGINNING AN INVESTING PROGRAM.

Caveat: This article is for information purposes only and may not be appropriate for your individual situation.

ACTION STEP:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

Take a RISK TOLERANCE QUIZ or 2 and jot down whether to weight your portfolio more toward stocks or bonds.

MSN Money Risk Quiz 

 Risk Tolerance Quiz from Rutgers University site by 2 finance professors (Source: Grable, J. E., & Lytton, R. H. (1999). Financial risk tolerance revisited: The development of a risk assessment instrument. Financial Services Review, 8, 163-181.)

image credit; purplemattfish

RECENT PERSONAL FINANCE CARNIVALS & Link Round up

I am honored to have my work showcased at these sites recently. Why not stop by & check out the fine articles?  

 How to Design a Budget with Room for the Fun Stuff was selected for a link round up at KNS Financial

Carnival of Money Stories at Eventual Millionaire published No Brainer Money Management for College Students

Carnival of Wealth at Personal Dividends posted Follow these Instructions and Get Wealthy

 

YAKEZIE PERSONAL FINANCE BLOGS

After every article for the next several weeks, you will be introduced to several Personal Finance web sites in the Yakezie network. Each one has their own unique voice and style. The consistency in all is their desire to help others. Consider visiting a few each day!

My Personal Finance Journey
Narrow Bridge

Not Made of Money
One Money Design
Out of Debt Again
Parenting Family Money
Peak Personal Finance
Personal Finance by the Book

The Best of BarbaraFriedbergPersonalFinance; 6 Month Anniversary Edition

Posted by Barb on August 24th, 2010

BarbaraFriedbergPersonalFinance instructs and motivates you to become wealthy by teaching basic personal finance principles with engaging stories and understandable examples. Learn to become rich and happy from a real Portfolio Manager

 

“KNOWLEDGE IS POWER.” Sir Francis Bacon

Who would have thought this quote, from the 1500’s would still ring true today?

Many years ago I read a letter written to Dear Abbey. (Yes, I read Dear Abbey, please don’t laugh.) The gist of it was this, a 38 year old guy writes that he wants to be a doctor, but is worried that he’s too old to go to medical.  He complains that he will be 42 years old when he finishes med school. Dear Abbey writes back, if you go to medical school now, in 4 years you will be a doctor, if you don’t go to medical school, then in 4 years you will just be 4 years older.

That letter stuck with me when I was deciding to return to school for a second graduate degree in mid life. It stuck with me when I began writing a book. And it was a factor in spurring me on to start a blog. In fact, my life is characterized by taking risks and moving forward no matter what. In the past, I was a huge procrastinator, insecure, and afraid of failure; I am proof of the power of stepping forward in spite of fear, age, obstacles, and criticisms of others.

On that note, I want to share my 6 month anniversary celebration as a personal finance blogger with you. My success in readership has far surpassed my expectations. I began with an Alexa ranking in the 1,000,000 range and have dropped to an impressive level of less than 160,000. I owe a large amount of that success to the YAKEZIE PERSONAL FINANCE NETWORK and Len Penzo dot com  who encouraged me to join. The Yakezie mission is in alignment with my own; selflessly  promote financial literacy and personal finance.  El Carino, my biggest cheerleader, promotes my blog both to those interested as well as the uninterested and loves me no matter what. In fact his support has given me the confidence to “try anything.” My daughter is my social media consultant extraordinaire, offering many ideas, strategies, and tips to touch her generation.  Additionally, she constantly provides insight into the GEN Y mind. Finally, my outstanding MBA professor, Dr.  Oranee  T.  encouraged me to start the blog and continue with my book.

On this 6 month anniversary I want to share the links that “Google Analytics” the blog analyzer, said are your favorites. Some surprised me, others not so much. The TOP articles cover a variety of topics from investing, to mental money problems, and the financial challenges of the poor.  If you haven’t read them before, please check them out and let me know what you think.

 I am honored by your support and look forward to offering you quality PERSONAL FINANCE information to help you become wealthy.

# 1 ALL TIME FAVORITE: GET RICH WHILE YOU SLEEP WITH THE MAGIC OF COMPOUNDING

“Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.”
Peter Lynch   

One of the greatest investors of our time attests to the simplicity of investing in the stock market. Read this post and find out why. Following is the “Cliff Notes” version of why you need to put part of your long term investment dollars in the stock market. 

Main Topic; Stocks  

The historical long term growth of American business is amazing. American business is frequently represented by the Standard and Poor’s 500 Stock Index (S & P 500). This index of 500 stocks is considered a barometer for the complete US Stock Market. 

Forget about the recent recession and downfall of the stock markets for a minute and take a peek at some historical returns of the S & P 500. Although historical returns do not guarantee future returns, take a look anyhow. When looking at these returns, think about the stock market as a collection of U.S. businesses, not mutual fund or brokerage account statements. Then ask yourself if you think U.S. businesses and the economy will grow over the next 20, 30, or 40 years?

Click here to read more.

# 2 RUNNER UP: HOW TO AVOID LIVING PAYCHECK TO PAYCHECK

“Have compassion for all beings, rich and poor alike; each has their suffering. Some suffer too much, others too little.” Buddha

Wealth requires a commitment and responsibility to those with less. Offer your knowledge and expertise to those without.

MAIN TOPIC: The Problem with Check Cashing Services

I just returned from a quick trip to Wal Mart to pick up some groceries. It’s Friday afternoon and my check out lane was directly across from the “Money Center.” This “Money Center” is a place where you can cash checks; for a fee, buy money orders; for a fee, and do a lot of other financial tasks; FOR A FEE. It is not a bank.

Because at a bank, if you have the right type of account, you can get your paycheck deposited FOR FREE!

The line was really long at the money center. In fact, there were people trailing out into the main part of the store. Many lower income people DO NOT HAVE A BANK ACCOUNT.

I remember back to my first full time job as an invoice clerk; I was amazed on payday when my co-worker and I went to the bank. She CASHED HER ENTIRE CHECK AND TOOK ALL OF THE MONEY! I thought it was quite odd that she didn’t put any of it into the bank.

But I digress, back to the Wal Mart Money Center. I got very despondent after seeing the enormous line-because I knew most individuals were there because they didn’t have a bank account. And they were lower income and paying a fee that higher income people didn’t pay, just to gain access to their money.

 I was struck by several things:

  1. How can one save, if he/she has NO BANK ACCOUNT?
  2. How can one move out of living “paycheck to paycheck” without a BANK account?
  3. Where are those individuals in the Money Center line going to learn the principles of Financial Literacy?

Click here to read more.

#3 THIRD PLACE (it was a tie): REDUCE STRESS-GET RID OF DYSFNCTIONAL FMONEY BEHAVIORS-part 3

Money & Relationships-Make it Work!

“I’d marry again if I found a man (or woman) who had fifteen million dollars, would sign over half to me, and guarantee that he’d be dead within a year.” Bette Davis

 You gotta take relationships with a bit of levity or you’ll never make it through! This quote is the perfect solution for money and relationship problems. Unfortunately, it’s a bit unrealistic. Maybe a million or two is more doable.

No really, read on and find out how to handle money stress in a relationship.

MAIN TOPIC: She’s a Saver, He’s a Spender

This article is the 3rd in a series relating poor money behaviors with stress (#1-Shopping to Solve your Problems & #2 Procrastinating Dealing with Financial Matters). The topics are inspired by an article entitled Emotions, Money, & Financial Stress by Nancy Losinno, published at the US Department of Energy, Brookhaven National Laboratory website . 

You know who I’m talking about. Bluetooth came out, he got it. Iphone, Ipad, flat screen TV, etc. he bought them all. New car every few years was required by him. Meanwhile the debt piled up. She tried to save, but his spending counteracted all of her efforts. 

I’m hesitant to continue, as the story is so familiar. We all know how it turns out…… fighting, stress, anger, depression, marital discord and DEBT.

Overspending in a relationship is unhealthy whether practiced by one or both partners.

Losinno clearly stated, that in a relationship the partners have the choice of creating WEALTH or a “FINANCIAL HELL ON EARTH.” Money secrets are devastating. Unhealthy family money attitudes can be disastrous. Money problems in a relationship can be the beginning of the end.

Click here to read more.

#3 THIRD PLACE (it was a tie): WHEN NOT TO SPLURGE

“If I splurge on anything, it’s cologne. I love smelling good.” Zac Efron

This quote suggests that Zac Efron, the wealthy movie star sensation from High School Musical and many more projects, is so financially savvy that his one indulgence is cologne. If that’s his lone indulgence, then this guy is on a path of financial strength.

Personal disclosure: I have never met nor spoken to Zac Efron. (Although I wouldn’t turn down an invitation to meet him!)

MAIN TOPIC: I am ALL FOR SPLURGING

I carefully plan my our family splurges:

  • El carino (my hubby) indulges in his hobby of collecting sports memorabilia.
  • I go out to work at a coffee shop once or twice a week and buy a coffee.
  • Special occasions find me at the COACH outlet for a nice bag.
  • Travel is planned and a big priority for our family. This week-end it’s a quick family get away to Atlantic City! (No gambling for us!)

I do not covet expensive jewelry, cars, fine dining (my birthday dinner was at Applebee’s this year). In fact, when el carino wants to tease me, he goads me with the offer to buy me jewelry (because he KNOWS I don’t value spending our money on expensive jewelry). In fact, I totally don’t get the women who want a huge diamond (bought on credit). Give me the cash any day to stick in the investment account.

Please don’t think this is a condemnation of cars, jewelry, or fine dining; it’s not. It is a recommendation to spend on those activities that YOU value, not what your neighbors, TV, or society tells you to value.

Click here to read more.

ACTION STEP:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

Commit, write down, and take one step towards financial responsibility today.

Image credit: Kazeee

YAKEZIE PERSONAL FINANCE BLOGS

After every article for the next several weeks, you will be introduced to several Personal Finance web sites in the Yakezie network. Each one has their own unique voice and style. The consistency in all is their desire to help others. Consider visiting a few each day!

Zordane.com

Yes I am Cheap; Digging my Way Out of Some Serious Debt

Young and Thrifty; Saving Generation Y

Well Heeled Blog; Savvy Living through Personal Finance

Wealth Pilgrim; A Journey to Self, Wealth, & Health

Wealth Informatics; Financial Freedom through Education

NEED EXTRA MONEY?: Do Not Do This!

Posted by Barb on August 21st, 2010

Do not withdraw Funds from your Retirement Savings

EXCITING NEWS: I was selected to deliver a national training in San Francisco this November entitled: Personal Finance Solutions for Busy Mental Health Professionals. This 3 hour workshop includes material from my upcoming eBook. Stay tuned to get first crack at the NEW EBOOK. And it’s FREE to my readers.

“Develop success from failures. Discouragement and failure are two of the surest stepping stones to success.” Dale Carnegie

World renowned for his inspirational teachings, many a successful individual  has started out on a foundation of Carnegie’s lessons.

MAIN TOPIC: Read this if you are Desperate for Cash

Financial problems are a reality today. We are not out of the economic woods with unemployment hovering around 9% or worse in some areas, and many homes worth less than several years ago. Foreclosures are rampant.

 If you are on the brink of a financial disaster, and have a 401(K) or IRA from an employer, you may be tempted to withdraw those funds. In fact, last spring when I was volunteering for the IRS, preparing tax returns, I came across more than 1 individual who cashed out their retirement funds.

There are HARDSHIP standards which let you cash out your retirement account before the mandatory retirement age. According to the 401K Help Center:

“The following items are considered by the IRS as acceptable reasons for a hardship withdrawal:

  1. Un-reimbursed medical expenses for you, your spouse, or dependents.
  2. Purchase of an employee’s principal residence.
  3. Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
  4. Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
  5. For funeral expenses.
  6. Certain expenses for the repair of damage to the employee’s principal residence.”

Here is why you DO NOT WANT TO WITHDRAW FROM YOUR 401(k) OR IRA:

Hardship withdrawals are subject to income tax and, if you are not at least 59½ years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back.

HERE IS HOW MUCH YOU LOSE:

 Withdraw $2,000.00 and take away 10%, that leaves $1,800.00. If you are in the 28% tax bracket, subtract another $560.00. Now you are down to $1,240. And that is BEFORE state and local taxes.

In summary, withdraw $2,000.00 and walk away with less than $1,240.00. Does that sound like a good deal to you?

If you need more motivation, consider this, when you take out cash from your retirement account, not only are you paying fees and taxes, you are losing money that is VERY HARD TO REPLACE. Left in place, you are providing for your future and giving your funds a chance to grow TAX FREE

In fact take that $2,000. Leave it in a stock index mutual fund for 20 years. With an average 9% return (long term historical return from stocks), in 20 years your original $2,000.00 is worth $11,208.82. Compare that with the $1,240.00 value NOW.

PRACTICAL APPLICATION: TAKE EXTREME MEASURES

Before even THINKING ABOUT withdrawing funds from your retirement account, do everything you possibly can to CUT EXPENSES DRASTICALLY. Leave no alternative unexplored.

My blogging colleague Jacob, at Early Retirement Extreme is an expert at cutting down expenses to the bare minimum. You would be surprised how little one needs to live on!

Before you TAKE MONEY OUT OF YOUR RETIREMENT ACCOUNT, follow these steps:

Reduce auto costs, get rid of one car or sell expensive car and buy CHEAP one.

Sell your home, move into an apartment.

Sell your stuff on eBay and Craig’s list.

Do all cooking from SCRATCH; no prepared foods. Cut food bill way down. Substitute beans & rice for meat!

Enlist your kids and get their ideas on cost cutting. No extravagances for them.

For an indulgence, bake a cake, take a walk, have a picnic!

Call all service providers and insurers to negotiate lower rates. Cut out cable, read instead. Cut out all subscriptions.

Read the list of blogs at the end of this article for more great cost cutting resources.

Don’t forget considering ALL ALTERNATIVES to make extra money!

Do your best to withstand the current financial hardship with PERSISTENCE, RESILIENCE, CREATIVITY, & PATIENCE. If you take action, your situation will improve. Borrowing from your future is a step to avoid AT ALL COSTS!

ACTION STEPS:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

Make a list RIGHT NOW of every way possible to cut expenses.

Make a second list of every way you can earn extra income. If you are unemployed, be sure to check out TIP #2 from this article. Consider a 2nd job or freelance/entrepreneurial activities.

Write in with your cost-cutting stories and any related questions. I am happy to help!

SAVING & COST CUTTING ARTICLES FROM WELL REGARDED PERSONAL FINANCE BLOGGERS:

Redeeming Riches

Consumerism Commentary

Single Guy Money

Consumerism Commentary

One Money Design

Wealth Pilgrim

Early Retirement Extreme

Not Made of Money

Sweating the Big Stuff

Deliver Away Debt

Little House in the Valley (get her free eBook on credit)

Budgeting the Fun Stuff

GET RICH WHILE YOU SLEEP WITH THE MAGIC OF COMPOUNDING

Posted by Barb on July 28th, 2010

Originally published on March 21, 2010

“Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.”
Peter Lynch   

One of the greatest investors of our time attests to the simplicity of investing in the stock market. Read this post and find out why. Following is the “Cliff Notes” version of why you need to put part of your long term investment dollars in the stock market. 

Main Topic; Stocks  

The historical long term growth of American business is amazing. American business is frequently represented by the Standard and Poor’s 500 Stock Index (S & P 500). This index of 500 stocks is considered a barometer for the complete US Stock Market. 

Forget about the recent recession and downfall of the stock markets for a minute and take a peak at some historical returns of the S & P 500. Although historical returns do not guarantee future returns, take a look anyhow. When looking at these returns, think about the stock market as a collection of U.S. businesses, not mutual fund or brokerage account statements. Then ask yourself if you think U.S. businesses and the economy will grow over the next 20, 30, or 40 years?

Average Annual Compounded Rates of Return  Of the S & P Stock Index for Various Time Periods 
40 Years 7/1969-6/2009  9.19%    
30 Years 7/1979-6/2009  10.75%    
20 Years 7/1989-6/2009  6.79%    

 

The first time I really studied this type of data was in 1993.  Although I had been investing for a while prior to that time, my husband was still skeptical. I wanted to convince my husband of the importance of putting money into the stock market so I prepared some data for him. Fortunately, for us he was convinced by the historical information, so we boosted our investing at that time and have watched our investments grow over time while continuing to contribute regularly to our investment accounts. 

 But what does this return mean in real dollars? 

Growth of $1,000.00 – At various interest rates Put $1,000.00 in at the beginning of each period. Do not add any more money. 
TIME PERIOD  RATE OF RETURN  VALUE OF $1,000.00 AT END OF PERIOD 
40 Years                        9.19%  $33,675.55 
30 Years  10.75%  $21,394.99 
20 Years  6.79%  $3,720.59 

 

Consider this, if you are in your 20’s, 30’s, or 40’s you have many years until retirement. You can stick some money in a brokerage account at one of the discount brokers (like Fidelity, Vanguard, Schwab, or  TD Ameritrade), invest that money in an S & P Index mutual fund or ETF and forget about it. Fast forward 20, 30, or 40 years, it is highly likely that your investment will have grown substantially! Even Rumplestilskin could try this and probably wake up a rich guy after sleeping for a really long time! 

Certainly, it is better to INVEST REGULARLY and not just one time! 

Now, I don’t recommend that you run out and stick the money into the account tomorrow unless you have a bit more financial knowledge. Continue to read BarbaraFriedbergPersonalFinance and before you know it you will have the skills to grow your net worth. 

Practical Application; How do I Proceed?     

  • Here is the takeaway from this post: 
  • The more time you have, the greater chance you have to get wealthy. 
  • Over time, the stock market has been a wonderful way to accumulate wealth. 
  • Since the stock market is very volatile, only put money into the market that you can leave there for 5 years or more. 
  • Invest only in stock index mutual funds or exchange traded funds (ETF’s) unless you have a lot of money and want to devote hours per week to researching individual stocks. 
  • For the best low effort long term returns, AUTOMATE! Have a regular amount automatically transferred in to a brokerage account each month from your paycheck or bank account.    

Action Step: 

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans. 

Grow your emergency savings to 6 months of living expenses in a bank savings account or money market fund by transferring automatically from your paycheck or checking account to a savings account. 

CAUTION: This post if for educational purposes and is not advice to run out and buy a stock mutual fund! Before investing, it is really really important to gain some basic financial education. And before sticking any money in investments you need to have savings for emergencies and no consumer debt! Think of this post as part of your lessons in “financial literacy.” Read this blog regularly, try out the action steps, and learn the basics before you start investing. Keep reading and become financially smart!

How has the recent stock market volatility affected your investing activity?

MBA Course: Investing & Portfolio Management-Class 4 – Get Rich by being Passive

Posted by Barb on July 6th, 2010

Active vs. Passive Management

Categories: investing, wealth, stocks, mutual funds

“Wall Street Pares Gains as Bargain-Hunters Retreat,” Associated Press, July 6, 2010

Today we are focusing on stock investing only. Unfortunately, many of you out there read headlines such as this one and believe you must rush out and BUY OR SELL. After all, if the headline is screaming at you, it must mean something.

Act on the headlines at your own peril.  

You might see your stock investment plummet, get nervous and want to ACT. Read on and see how being passive works out in the long run.

MAIN TOPIC: Why you Must Ignore the Investment Headlines

Raise your hands if you watch CNBC, Jim Cramer, or any investing program. Who here checks on their stock and mutual fund prices daily; and scours Yahoo Finance and MSN Money for financial news?

Now, don’t be shy, you know who you are. You think you are being very diligent and keeping up with the market and your investments. Well, you’re wrong.

  • Are you trying to beat the market performance?
  • Find the hottest stock?
  • Get rich quick?

Stop right now. There is a better way, with a greater chance of yielding long term wealth.

In this class, you will learn:

  • The historical performance of the stock market and why it matters.
  • Stock market facts & what they mean about getting wealthy.
  • How being passive leads to wealth.

PRACTICAL APPLICATION: Active Managers are Losers

 Over 20 years, the S & P Index beat 68% of all actively managed funds.

In other words, most investors in actively managed mutual funds with “professional money managers” (who regularly bought and sold stocks) had worse returns than investors who stuck with unmanaged INDEX FUNDS.

Active managers believe they can outperform the indexes with their superior stock picking ability. In reality, any fund with an active manager(s) has higher costs than an index fund. That means right off, they have to beat the index substantially in order to cover their larger expenses.

Active managers frequently demonstrate superior performance for a year of two. Do you think it typically continues for the long term? NO it does not. Many research studies show that actively managed mutual funds with outstanding performance one year have subpar results the next.

Active managers are the ones who listen to the headlines and jump in to buy or sell based on “the news.”

 This ACTIVE strategy yields long term UNDERPERFORMANCE.

The economy goes up and down and so does the stock market. Expect these ups and downs and do not be surprised by them.

Since 1960 there have been 9 Bear Markets (decline of 20% or more in the overall stock market). In spite of these declines, the S & P 500 had an annualized return of 10.05% from 1926 to 2007.

Let’s look at the Active vs. Passive investing debate another way.

HOW MUCH WEALTH MIGHT YOU HAVE EARNED BY INVESTING IN THE STOCK MARKET as represented by the S & P 500 Index? 

Growth of $1.00 in S & P Index from 1980-2000

In 1980, invest $1.00.

In 2000, that dollar grows to $18.41

That is equal to an annual compounded return of 15.68%; Definitely one of the most profitable times to be invested in the stock market.

Suppose you were an active manager who missed THE BEST 15 MONTHS OF THE PERIOD. (Let’s say you were very unlucky and took your investment money out of the stock market for the best 15 months in the 20 year period).

Without the best 15 months between 1980-2000, your $1.00 investment in 1980 would have grown to $4.73 or a compound annual return of 8.08%.

Now an 8.08% return looks fairly attractive today, but in comparison with a 15.68% return, it’s poor.

 

 

What about the longer term, does this theory still hold?

Growth of $1.00 from 1926-2000

 

In 1926, invest $1.00.

In 2000, that dollar grows to $2,285.00

Leave out the best 37 months, the $1.00 is worth $17.42

 

DO NOT JUMP IN AND OUT OF THE MARKET.

Do you know when the market will have the biggest increases? Of course not, no one can predict the future! The lesson is this; active management leads to worse returns than simple index investing.

TIME IN THE MARKET is the best way to get rich.

Start now and continue investing. Buy an index fund  or two, continue with regular investing, and if history is any guide, over time you will become rich.

Investing terms:

Stock Market: Usually refers to an index of many stocks or bonds which serve as a proxy for the total stock market. The most common index for stocks is the S & P 500.

Active management: Buying and selling stocks or bonds in an effort to outperform the overall market.

Passive investing: Invest in index funds in order to minimize fees and expenses and match the overall market performance.

Are you an active or passive investor? How is your investing strategy working out?

ACTION STEPS:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

Read this article before investing any money.

When you are ready to invest, commit to regularly  contributing to a stock  mutual fund as part of your overall investment plan.

Caveat: This article is for information purposes only and may not be appropriate for your individual situation.

 

YAKEZIE SHORT CARNIVAL:

What’s a good car price and why should you keep it a secret? @Car Negotiation Coach

Condom Factory and Bonds: What’s the Connection  @The Millionaire Nurse Blog    

Bankruptcy is not a Sin @ Financially Poor

The 4 Worst Ways to Impress Your Boss @ Sweating the Big Stuff

PURE PERSONAL FINANCE SATISFACTION; Enjoy a Delightful Menu of Inspiring Reading

Posted by Barb on June 29th, 2010

Categories: links, investing, money management, saving, make money

Welcome to a collection of amazing articles. Each one of these posts was chosen for its innovative ideas and thought provoking topics. After digesting this wonderful menu of diverse reading desserts, you will be smarter and wealthier.

Following are links to these delicious articles and a taste of their content. Go on and indulge.

The Oblivious Investor throws in a twist with 3 Good Stocks to Buy Right Now.

“Quick reminder: The fact that a company is growing (or is going to grow) does not by itself mean that its stock is a good investment. For a stock to be a good investment, there must be reason to think that its future growth is not already reflected in its price. Said differently, for a stock to earn above-average returns, the company must do better than the market expects it to.”

The Car Negotiation Coach at Findthebestcarprice reveals How to get Paid to Drive. INGENIOUS!

“Did you know you can make money just by driving your car? You can, if you are willing to allow a company to put an advertisement on it. These advertisements, called wraps, look like they are painted right on the vehicle, but they are just really nice decals. The programs are called ‘free car’ or ‘get paid to drive’ and they pay you for advertising for their product on the side of your car.”

In Best Way to get out of Credit Card Debt Fast, Wealthpilgrim offers a new take on an old subject!

“I don’t know about you, but sometimes when I face a daunting task I waste energy and time. Sometimes I spend too much time thinking about where to start. Other times I use the shot gun approach rather than focus my efforts. When I do that, my results are diluted.”

Littlehouseinthevalley reveals  how to make a quick call and increase your spendable income in Smashing the Bills to Smithereens! I love this.

“Constantly looking for ways to reduce our monthly bills, a few quick phone calls revealed a total savings of $63 a month without reducing our services! Here’s how I, er, my husband did it with my help. I keep an excel file that lists the averages of how much all of our bills cost on each month. I have everything listed in categories, for instance under the category of CAR I included auto insurance, car payment, and gasoline. Out of a total of about 25 items (a lot, I know!) I pay on a regular monthly schedule, I went through my list and highlighted the items I thought we could save on without downgrading any of our services. Those items took only a phone call and included the phone bill, DSL service, and auto insurance for a total savings of $63 a month, or $756 for the entire year.”

Something to think about…..from Investitwisely in How Rich are you?

“In the beginning of time, every man was equally poor, or equally rich, depending on how you look at it. Then we discovered agriculture, and the surplus of food enabled specialization of labour, which gave birth to cities and to civilization. Since then, we’ve been more or less divided into three economic groups: The poor, the reasonably well off, and the ultra-rich.”

As usual, Shawn at Watson Inc. keeps me thinking with this thought provoking Millionaires Make Return to Boom Levels.

“Additionally, don’t forget who the average millionaire is. Remember that the typical millionaire is not a Wall Street titan, a corporate fat cat or a celebrity but rather a hard-working entrepreneur (32%) or professional (19%). Moreover, even though both the 14th Annual World Wealth Report and the 2010 Global Wealth report rightfully exclude primary residences in determining HNWIs, keep in mind that approximately 97% of millionaires are also home owners.”

I’m a sucker for anything “efficiency related.” Hope you enjoy this one from Myfinancialobjectives entitled Bringing Your Efficiency Home.

“What I mean by the title, is how much more could you accomplish at home if you brought the same efficiency home with you that you use at work (assuming you are more efficient at work than at home)?  I recently posted about Time Management and how an efficient time management mentality allows me to save a lot of time both at work and at home.” 

Frugalconfessions writes about the positives of keeping an eye on your spending in Financial Limits and Boundaries Breed Creativity not Deprivation. She’s definitely a “glass half full”  person.

“then I would miss out on all of the great opportunities out there. For one, I never would have learned the Drugstore Game, which led me to write six columns called “Frugal Confessions” and start this blog! Having unlimited money would have caused me to spend more of it (necessity is the mother of invention, not abundance) as I never would have discovered great tools like Craigslist, followed many of the blogs that I do with people dedicated to saving me money, learned how to invest my precious resources, save for retirement, etc. Having limits in my life has only served me, not caused me deprivation. With limits, opportunities abound—have you taken advantage of yours?”

 Get the latest word on MOTIVATION research in Management Rewired by Charles S. Jacobs, discussed at Eliminatethemuda.

“More and more the science is showing that everything we thought we knew and understood about motivation may be wrong. Contrary to our perception, providing extrinsic motivators such as bonuses, gifts and rewards or even punishments for undesirable behavior may often be detrimental to our long-term objectives. There are more effective and efficient methods to motivate and manage, the author shares, but many of these methods are counter intuitive and challenging to implement.”

Let me know if you enjoyed the tasty tidbits of financial wisdom!

 image credit Chotda

MBA Course: Investing & Portfolio Management-Class 3-The Lazy Investor’s Guide to Asset Allocation

Posted by Barb on June 21st, 2010

Categories: investing, asset Allocation

“Don’t put all Your Eggs in one Basket.”  Anonymous

This adage is CRUCIAL TO INVESTING. Plainly put, spread your risk around to keep your overall risk level lower.

There is an irony about investing-sometimes adding a high risk investment to a portfolio reduces overall risk.

I’m teaching an 8 week course in the MBA (Master of Business Administration) program at a local College. I thoroughly enjoy the information I am teaching as well as sharing it with the 15 students in the class. This knowledge is so important that each week, I’m going to take one of the basic concepts from the class and distill it for you. After reading each article you will gain a useable investing skill. This is the third class in the series, please check out MBA CLASS 1: Risk & Reward  and MBA CLASS 2: Bonds, as well.

Before beginning any investment program, please follow these steps

MAIN TOPIC: What is Asset Allocation?

Jack is afraid of the stock market, investing, and any movement in the value of his assets.

Jill understands that in order to receive greater wealth in the future, she must take some risks.

Here’s the Scenario:  Jack and Jill each save $300.00/month for 40 years.

(Assumption: average annual long term returns for stocks 8.5%, bonds 5.0%, cash 3.0%; cash assets are certificates of deposits from a bank or a money market fund)

Look what happens with each of their finances:

Jill invested in a combination of 60% stock assets; 30% bond assets; 10% cash for a combined average return of  6.90%; Final account value =$770,077.00

Jack invested in only cash assets for an average return of 3.00%; Final account value =$278,512.00

$300 INVESTED MONTHLY FOR 40 YEARS

  Average annual return Monthly contribution Total amount invested Value after 40 Years
JILL 6.90% $300.00 $144,000.00 $770,077.00
JACK 3.00% $300.00 $144,000.00 $278,512.00

Clearly, a mix of assets offers higher long term returns than cash alone. Jack and Jill are a perfect example of how investing the same amount of money yields widely different returns.  Jill invested in a conservative asset allocation and ended up with $491,565.00 more than Jack.

But, wait a minute. What about the risk? Who had more risk or volatility? Well, Jack had NO VOLATILITY WHATSOEVER. The value of his investment never went above or below the interest payment + initial investment. On the other hand, Jill had to weather some ups and downs. There were even some years when her total investment value declined.

PRACTICAL APPLICATION: What to do?

Jack and Jill’s simple example illustrates the potential returns and risks of investing. In life as well as in investing, the greater the reward, the greater the risk. So, ask yourself, for future goals like retirement, college for your kids, a down payment on a home, are you willing to stomach a bit of risk in order to gain a larger return?

Jill didn’t spend a lot of time of effort on her investing; in fact, she chose these Index funds for her portfolio:

40% Vanguard Total Stock Market Index

20% Vanguard FTSE All-World ex-US Index

30% Vanguard Total Bond Market Index

10% Money market fund

Don’t make investing mysterious or complicated. Satisfactory returns can be gained with regular investing over the long term. 

Caveat: This article is for information purposes only and may not be appropriate for your individual situation. 

ACTION STEP:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

Educate yourself in investing by visiting Investopedia and Moneychimp.

 Basic Terms:

Risk: Volatility or the price of your stocks and bonds going up and down.

Return: The amount of additional money you receive (or lose) on top of your original investment.

Financial asset: Stock, bond, cash etc. These assets can be combined in a myriad of ways and purchased in a mutual fund or exchange traded fund (ETF).

 

“You Like me, you really like me.” Sally Fields after winning an Academy Award.

OK, I didn’t even win an academy award, but I am honored to have my personal finance articles recommended by my colleagues. Here are some links to other sites featuring my articles & be sure to check out the other personal finance bloggers’ work as well:

How trading in a car every 2 years makes good financial sense @ Personal Finance by the Book

The Secret to Cutting Your Debt Immediately @ MoneySmartBlog, Invest it Wisely, & Personal Finance by the Book

How to Avoid Living Paycheck to Paycheck @ Tight-fisted Miser

Catfight of the Personal Finance Blogger Chicks; Bring it on @ Out of Debt Again & Len Penzo dot com

MBA Class 2: Investing & Portfolio Management-Bonds @ Invest it Wisely

For even more great Personal Finance Reading; visit these CARNIVALS I’ve participated in recently:

The Carnival of Financial Planning @ Money Smart Blog  

 Carnival of Money Stories 2 @ Green Panda Treehouse

MBA Course: Investing & Portfolio Management-Class 2

Posted by Barb on June 13th, 2010

BONDS

Categories: investing, mutual funds, bonds

“The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelope our future” John Maynard Keynes

One of the foremost economists of the last century succinctly states a reason to invest. Learn the simple principles of investing through this MBA series taken directly from the graduate course I’m teaching in Investing & Portfolio Management. Don’t be intimidated, grasp important investment concepts in an easy to understand format.

After reading this article you will gain a useable investing skill.

As I mentioned previously, please follow these steps before beginning any investment program.

Main Topic: What are BONDS & do I need them?

 

Last class we talked about risk versus reward. In investing, the greater the risk, the more opportunity for reward or a high return.  Risk means that your investment is going to go up and down in value; with higher risk investments  exhibiting greater volatility.

 A BOND is a loan to a corporation, municipality, or government. When you buy a bond you are making a loan to the bond issuer. In exchange for the loan, you receive an interest payment. The amount of interest you are paid is directly related to amount of risk you are taking. (The interest in bonds is called a coupon payment).

Buy a corporate bond from a corporation with financial troubles, you get a high interest rate because if that company goes bankrupt, you might lose all of your initial investment.

Buy a U.S. government bond, you get lower interest rate, because your money is invested with a secure government who will pay you back your original investment when the bond matures.

A government bond is the safest bond to buy; it also has the lowest interest rate. Riskier bonds pay higher interest rates.

Here’s why you need bonds:

Jose is 33 years old, married, with term life insurance, 6 months cash in a savings account, and pays off his credit card bill in full every month. Three years ago, he and his wife invested in 2 index mutual funds:

  1. Vanguard total stock market index (VTSMX)
  2. Vanguard total international stock index (VGTSX)

He believed that since these 2 funds held lots of different companies from various parts of the world, he was sufficiently diversified and did not need any other investments.

 Look what happened to the value of his investment portfolio from 2007-present.

Fund Percent in Fund 3 Year Return
Vanguard Total Stock Market Index (VTSMX) 50% -07.68%
Vanguard Total International Stock Index (VGTSX) 50% -10.25%
COMBINED RETURN FROM BOTH INVESTMENTS 100% -08.97%

 What if he added BONDS to the portfolio 3 years ago? 

Fund Percent in Fund 3 Year Return
Vanguard Total Stock Market Index (VTSMX) 33% -7.68%
Vanguard Total International Stock Index (VGTSX) 33% -10.25%
Vanguard Total Bond Index (VBMFX) 34% 7.17%
COMBINED RETURN FROM ALL 3 INVESTMENTS 100% -03.45%

 Notice, with no bonds, Jose’s portfolio LOST 8.97% over 3 years; with bonds, his portfolio lost only 3.45%.

PRACTICAL APPLICATION: What is the takeaway?

  • Investing is only for money needed in 5 years or more, because in the short term, the returns are volatile. These last 3 years prove that point.
  • As long term returns of stocks and bonds are almost always positive and greater than returns in savings accounts, these investments are beneficial for generating long term wealth.
  • Combine bonds, stocks, and some cash to an investment portfolio to lower risk (volatility).
  • A combination of stocks, bonds, and cash will likely beat the investment returns over a cash savings account over the long term.

Why invest at all, the 3 year returns were NEGATIVE?

  • Historically long term returns for stocks are about 9%, bonds near 5%, and cash in the low single digits.
  • Combine the three assets, reduce risk, and increase returns over cash alone.
  • Invest in mutual funds to simplify. No need to pick individual stocks or bonds.
  • Although 3 year returns were negative, had Jose continued to invest monthly, instead of just once at the beginning of the 3 year period, his returns would have been higher.
  • It is highly likely that in 10 years and longer, his investment value will be much greater. 

Caveat: This article is for information purposes only and may not be appropriate for your individual situation.

ACTION STEP:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

Learn more about bond investing at Money Chimp. 

Yakezie Short Carnival: Personal Finance Lessons Learned from Bambi @ Personal Finance Firewall;  The Cost of Making your House a Home; Average Spend in your First Year of Home Ownership @ Frugal  Confessions; Post Transaction Marketing; Helpful Links or Ripoff @ The Millionaire Nurse

MBA Course: Investing & Portfolio Management-Class 1

Posted by Barb on May 25th, 2010

Risk versus Reward

Categories: investing, mutual funds

“When the weather changes, nobody believes the laws of physics have changed. Similarly, I don’t believe that when the stock market goes into terrible gyrations its rules have changed.” Benoit Mandelbrot

This brilliant mathematician speaks to the fact that the price of common stocks goes up and down. Plain and simple, that is where the risk comes from.

I’m teaching an 8 week course in the MBA (Master of Business Administration) program at a local College. I thoroughly enjoy the information I am teaching as well as sharing it with the 15 students in the class. This knowledge is so important that each week, I’m going to take one of the basic concepts from the class and distill it for you.

After reading the article you will gain a useable investing skill.

As I have mentioned in a previous article, please follow these steps before beginning an investment program.

Main Topic: What is the relationship between investing return and risk?

Understand the relationship between risk and reward and become a smarter investor. There is an unavoidable trade off between risk and reward. If you desire a higher return on your investment, you must take greater risk.

Reward=More money back from your initial investment

Risk=Possibility that your payback won’t be what you expected, but less than you expected.

 NO ONE IS UNHAPPY IF THEY MAKE MORE MONEY ON AN INVESTMENT THAN PLANNED!

So the risk is really that your investment will be worth less in the future than when you started.

How to get a reward from investing?

  1.  Buy a financial asset such as a mutual fund which hold common stocks. One of my favorites is Vanguard Total World Stock Index Fund Investor Shares (VTWSX).
  2. Receive periodic dividends (cash payments) along the way.
  3. Watch your investment increase in value.

How much might I earn?

  1. Over the last 80 years, U.S. stocks returned a bit over 9%/year.
  2. There is a strong probability that holding this stock mutual fund for 10 years or more would produce a greater return than keeping your money in a savings account.
  3. If you invested $1,000 in year 1- received a 7% return for 20 years, you would have about $4,006.00 at the end of 20 years.

How can I get this terrific return?

  1. Open a brokerage account at Vanguard.com.
  2. Arrange to have money transferred to the account from your bank account.
  3. Purchase a diversified stock index fund (a fund that holds lots of different stocks from a variety of industries).
  4. Reinvest the dividends; instruct Vanguard to buy more shares of the fund with the dividends.
  5. Wait 10-20 years.

What is the risk?

  1. Stocks, like those in the mutual fund you bought go up and DOWN in price. The risk is almost certain that during those 10-20 years, some years, the value of your investment will go down.
  2. There is a possibility that you might have less money than you started if the historical trend of the stock market shifts and becomes negative.

How do I decide whether investing in a stock mutual fund is for me?

If you answer YES to these questions, investing in a stock mutual fund may be

right for you:

  1. Do you have 6 months of living expenses in cash in a safe savings account?
  2. Do you have term life insurance for your dependents?
  3. Are you without credit card debt?
  4. Can you leave the money in the stock mutual fund at least 8-10 years?
  5. Do you want to earn a greater return than the inflation rate for future goal(s)?
  6. Can you sleep at night and not panic if your investment value declines sometimes?

PRACTICAL APPLICATION: Why Take the Risk?

In investing, the greater the potential reward, the greater the risk. Common stocks have the potential to offer high returns in the long term. In the short term their values move up and down so much that it is impossible to predict whether your return will be positive or negative.

If you want a way to finance long term goals such as retirement, home renovations, down payment on a home, and college expenses for your child, then stock mutual funds are an excellent vehicle. However, if you cannot cope with an investment that goes up and DOWN in value, do not invest in common stock mutual funds.

Caveat: This article is for information purposes only and may not be appropriate for your individual situation.

ACTION STEP:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it for all of your personal finance goals, thoughts, activities, and plans.

 If you are interested in investing, and want to read more, check out these resources:

Vanguard investing truths

Get Rich While you Sleep with the Magic of Compounding

 Little Known Investing Secrets: How to Buy Low (Always)

 

 Please check out the PERSONAL FINANCE CARNIVAL list on the right. Every week I participate in these wonderful events jam packed with entertaining and informative information about money and life. Click on any one of the titles and enjoy a personal finance festival!

HERE IS AN INVESTMENT GUARANTEED TO KEEP PACE WITH INFLATION-Part 2

Posted by Barb on May 4th, 2010

Categories: investing, bonds

 “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”  Ronald Reagan 

Since we haven’t had much inflation in recent years, it’s easy to forget about it’s VIOLENT IMPACT.

One of President Reagan’s (1981-1989) political challenges was combating the rampant inflation of the time. He entered office after record inflation levels of inflation!

Check out what Reagan was talking about. These are the inflation rates from 1975 to 1986: 

YEAR AVERAGE INFLATION
1986   1.91%
  1985   3.55%
  1984   4.30%
  1983   3.22%
  1982   6.16%
  1981   10.35%
  1980   13.58%
  1979   11.22%
  1978   7.62%
  1977   6.50%
  1976   5.75%
  1975   9.20%

Just so you get an idea of what it really means, if you bought a video game in 1975 for $47.38, that same game would cost $100.00 in 1985. Don’t get complacent and think that we will never have high inflation again. It’s quite likely, that higher inflation levels will return in the future!

MAIN TOPIC: Protect your Money from the Ravages of Inflation

The previous post  talked about buying I Bonds as a way to invest and make sure that your investment keeps up with the impact of inflation. Even with 3% inflation per year (the historical average), your $10.00 meal out will cost $13.44 in 10 years. Now, bump inflation up to 5% and watch that $10.00 meal go up to $16.29. Now, apply those inflation increases to EVERYTHING YOU BUY. Don’t think you will avoid inflation in the future.

Here’s another investment which keeps up with inflation and is also issued by the government: TREASURY INFLATION PROTECTED SECURITIES. They have the same goal as Series I Savings Bonds, TO PROTECT YOUR CASH FROM INFLATION RISK so when you need it in the future, the purchasing power hasn’t been eroded.

 TIPs are bond-like investments issued by the US government. They have a fixed interest rate… BUT they keep up with inflation because when INFLATION RISES the principal amount of the security (bond) also goes up. On the flip side, when inflation drops, so does the principal amount of the bond. At the treasury direct website there is lots of information about TIPS.

PRACTICAL APPLICATION: What are Treasury Inflation Protected Securities (TIPS)?

Government Bonds 101

Buy a government bond and you are making a loan to the U.S. Government.

In exchange for the loan, the government pays you interest.

  

How does the TIPS investment work?

 With TIPS, the interest rate is set at the purchase date. It always stays the same.

BUT-the PRINCIPAL value of the investment goes up and down with the inflation rate.

AND when the principal increases (decreases) you will get a LARGER (smaller) interest payment on the new principal amount.

 

When the TIPS security matures, you get the higher or original principal amount; At maturity, you never get a smaller principal.

 

 

 FACTS ABOUT TIPS:

You can buy them on-line here. They can be purchased in increments of $100.00.

TIPS have maturities of 5, 10, & 30 years.

You can hold it until it matures OR you can sell it in the open market thought an investment brokerage company like Charles Schwab, E*TRADE, Fidelity, Vanguard, or TD Ameritrade.

They are subject to federal tax only, NOT state or local. You pay the tax in the year it is earned.

 THE EASIEST WAY TO BUY TIPS:

There are several mutual funds which hold many TIPS in various maturities. It is really easy to buy them, through one of the Investment Companies listed above. This article offers a comprehensive list of advantages to purchasing a TIPS mutual fund

How do I Bonds & TIPS compare?

  TIPS I BONDS
Type of Investment Marketable-can be bought & sold thought investment companies. Can buy TIPS mutual funds. Non-marketable. Bought through treasurydirect site, bank or some employers
Face Amount (PAR) Minimum $100 for individual TIPS. Funds set by investment companies. $25.00 or more, up to $5,000/year.
Interest Set semiannually-paid on adjusted principal Interest is accrued over life of bond & paid upon redemption
Lifespan TIPS mutual funds can be held indefinitely. Individual TIPS can be held to maturity (5, 10, or 30 years) or sold prior in the secondary market. Redeemable after 12 months (with 3 months interest penalty). No penalty after 5 years. Earn interest up to 30 years.

 

RISK is always a factor in investing.

 Inflation risk manifests insidiously by causing the same dollar to purchase LESS & LESS product(s).  Another way to look at inflation is; the identical goods cost MORE and MORE. A savings account or CD (Certificate of deposit) is subject to inflation risk as the interest rate stays the same even though inflation may be rising.

 Series I & TIPS government bonds protect your money from inflation risk.

ACTION STEP:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

Jot down the advantages and disadvantages for this investment for you. Visit the treasury website  to get more information about inflation protected investments.

 Caveat: This article is for information purposes only and may not be appropriate for your individual situation.

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